Analysis of Ryanair

Summary Ryanair, one of the most famous low cost airlines, attracts attentions from people and researchers all over the world. As the financial crisis and the European debt crisis have an obvious negative influence on the global economy, the aircraft industry has experienced some decline for the last few years. However, both the sales and profits of Ryanair have increased during this period. In this essay, we will first analyse the external environment of Ryanair by using PESTEL Analysis Model.Then we will make an in-depth analysis about its strategic capability by SWOT model (strengths, weaknesses, opportunities and threats). In the following part, we will compare Ryanair with its biggest competitor easyJet and critically access the effectiveness of its cost focus strategy. Finally we will give a conclusion of the whole result of our research and give some suggestions for its future development. Introduction Ryanair was first established in 1985 by Christy Ryan, Tony Ryan and Liam L onergan.Its headquarters are located in Ireland, while its primary operational bases are at London Stansted Airports and Dublin. In 1989, Ryanair’s businesses saw a decline. At the same time, Tony Ryan persuaded his financial advisor to assume the CEO. Then, Ryanair began to learn experience from Southwest Airline, and was the first one to introduce the cheap air carriers and mode into Europe. Profitability of consecutive years has made Ryanair to become the most profitable airlines in the world. Findings and Analysis Environmental AnalysisPESTEL Model is used in this report to give an overview of the six different environmental factors that the company has to take into consideration. Firstly, political factors refer to the political organizations and relevant policies, laws, regulations as well as other factors which have the actual and potential impacts on operating activities (Gillespie, 2007). The charge which was raised by airports of different countries has a significan t effect on Ryanair. Indirectly, Ryanair is also insubstantial to extra charges and taxes, for instance, the â‚ ¬10 tourist tax imposed by the Irish government.In addition, EU imposed a regulation on 17 February 2005, which asked airlines to provide standardized and immediate assistance for passengers who stayed at EU airports for delays, cancellations and denied boarding. This regulation led Ryanair to raise at least â‚ ¬200 million in their budget every year. (O’Higgins, 2011) Secondly, economic factors mean the organization's external economic structure, industrial layout, resource situation, the level of economic development and future economic trends (Gillespie, 2007). There are two interrelated economic factors that affect Ryanair. The first one is the recession of 2008/09.It created adverse economic situations such as high unemployment rates and severe credit crisis, which lead to the leisure spending and business passengers declining. Ryanair's planned passenger volume growth has been restricted by this depression. Moreover, the continuing growth of fuel price is the greatest concern to this company. It is hard to control and predict the wide fluctuations of Jet fuel price and its increase demand. According to Pearce (2011, 3), â€Å"However, the developed economies have seen a much slower recovery and levels of output, income and spending remain well below pre-recession levels†.Thirdly, social factor refers to the historical development, cultural traditions, values, education levels, as well as customs and other factors of society where the organization belongs to (Gillespie, 2007). It can be found in Ryanair's own report (2012) that Ryanair as well as other airlines are facing some social changes–threats from terrorist attacks, the continuing acceptance of the security budget suppliers and more price-sensitive business travelers. These factors make up the social factors which affect Ryanair and aviation industry.Fourthly, t echnological factors include not only the revolutionary innovation but also some relative new technologies, new materials and new ways of operating or management (Gillespie, 2007). For airline industry and airline companies, the contributions of technology could be separated in three parts: to ensure aviation safety, to improve the quality of services and to make operations more efficient. Even Ryanair bought some of second-hand planes, these aircraft are all Boeing 737, which could reduce the training fee for pilots and flight attendants (Box, 2005).More important, Boeing's help to make the unitive structures of plants could decrease the possibilities of incorrect operations and the unsuited spare parts of aircrafts. Although Ryanair is widely regarded as a low cost airline, it is also one of the safest airlines. As some of other airlines rely on the tickets agents, Ryanair built its own website and ticketing system. The cost of agency fee is reduced and the company could make cont rol of the ticket service which could lead to some misunderstandings as some operators of tickets agents would treat customers in a worse mood.Furthermore, through operating the ticketing system, Ryanair itself, could make booking tickets and bounce easier and speedily. Fifthly, environmental factors include ecological and environmental aspects. Countries in the world are faced with the enormous challenges of environmental issues, and sustainable development is an important way to solve this problem (Gillespie, 2007). Due to the report of IATA, air transport contributes 2% of global man-made CO2 emissions. Although Boeing 737 helps Ryanair to save fuel of airplane, it is not enough at the moment.New energy sources such as biological energy source are in the experimental stage and should be used in the further, and most airlines have to adapt to the new development. Lastly, legal factors include discrimination law, consumer law, antitrust law, employment law, and health and safety la w (Gillespie, 2007). Ryanair's latest attempt to take over its Irish rival Aer Lingus is investigated by the European Commission over competition worries. Ryanair also has problem with the government. The British government decided to remain the Air Passenger Duty (APD), a ladder-type tax, and raised the tax rate by nearly 10%.This change leads to the increase of cost of daily operation of Ryanair. To cover the costs of the EU's new eco-looney ETS tax, the Ryanair has to raise the prices of tickets, which could make their prices less competitive. Furthermore, BAA, the owner of London's Heathrow airport, is seeking to sell Edinburgh after losing a legal challenge to an order from the UK's antitrust regulator to break up the company, while the bid of Ryanair is rejected by BAA (Rothwell, 2012). Strategic capability analysis SWOT Analysis Model is used to assess the strategic capability of Ryanair by four dimensions: Strengths, weaknesses, opportunities, threats.Strength 1. Low-cost st rategy The most significant strength of Ryanair is its low-cost strategy. It uses a young efficient fleet with low cost of ownership and industry load factors to increase benefit and gain high asset utilization. The following statement from their CEO Michael O’Leary proves that â€Å"These quarterly results are a testimony to the strength of the Ryanair ‘lowest cost’ model which – even during the most difficult trading conditions (including record fuel prices and intense competition) – delivers strong passenger growth and profits. †(Sorensen, 2005) 2. Youngest fleetRyanair only choose to use Boeing 737 planes for easier staff training and also can improve pilot’s familiarity with aircraft operation, in this way to keep customers’ safety. According to O’Higgins Ryanair â€Å"reducing the average age of its aircraft to 2. 4 years† which be the youngest planes in Europe and increased the safety of the flight (2011). 3 . New kinds of marketing strategy Ryanair uses newspaper, radio, television and all the possible methods they can to advise, which are proved to be efficient on increasing the number of customers: â€Å"as a result,Internet bookings account for 99 per cent of all reservations†(O’ Higgins, 2011).Otherwise, some methods might be controversial and audacious, such as using the pictures of Queen Sofia, President Sarkozy and his wife’s on the air slipping. Although the action is without permission and also costs damage, it still made the company become famous rapidly. Weakness 1. Customers’ dissatisfaction Ryanair takes a lot of ancillary revenues from customers, which causes customer’s dissatisfaction, such as payment for using the toilet on plane, charge for check-in luggage and â€Å"fat tax† for overweight passengers. These measures will lead to customer’s bad impression to the company. 2. Overstep in increasing scaleRyanair is too addi cted to increasing scale. This will cause the increasing of operating costs. With the growing of fuel and airport charges, the bigger scale of the company is, the more challenges it will be faced to. 3. Single-handed leader and the controversial acts As Ryanair’s CEO, Michael O’Leary is a controversial leader. The issues he made such as calling thousands of passengers â€Å"idiots† (Huff Post, 2012), using the Italian minister Umberto Bossi abusive gestures picture for advertising caused great repercussion. Most of people think this measure was not suitable and will give a bad impression on Ryanair.Opportunities 1. New markets With the enlargement of the European Union, a lot of new destinations could be opened up. Skies agreement opened by EU could be a source for increased routes and passenger traffic inwards. According to the opinion of Ryanair’s route development director O’Toole, there remains major opportunities in Spain and Italy, as well as Norway, Portugal, Greece, Bulgaria, Cyprus and Russia (Routes Online, 2010). Besides that, future open skies agreements in Turkey, Tunisia and Georgia could make these interesting countries for the carrier, he added. 2. Benefits from economic recession.Though economic slowdown created unfavourable economic conditions with reduced spending by leisure and business passengers which restricts the growth of the whole airline industry, actually, it can help Ryanair to improve corporate culture, and ‘steal’ customers from traditional carriers as they seek lower fares. Mr. O'Leary, Ryanair’s CEO, stated that the rise in profit came â€Å"despite the economic downturn† in Europe (New Europe Online, 2011), and he intended to double the size of the airline over the next decade. Threats 1. Increasing oil price Ryanair’s earning rate highly depends on the oil market because the fuel cost is influenced by it.With the increasing of global oil price, fuel cost cou ld be a burden for Ryanair and its expansion plans will be challenged by the high fuel price. 2. Increase of low fare competition According to Newll (2006, 3), â€Å"Yet perhaps the price tag has become too much the focus of attention†. Value market segment is being catered by an increasing number of competitors, such as easyJet, Air Berlin, Basic Air, BMIBaby. Slots at some primary airports have been established by them (Air Scoop, 2007). Ryanair have to compete directly with other low cost carriers in the near future.At the same time, additional marketing costs and reduced yields from lower fares force Ryanair to promote additional routes. As a result, Ryanair was likely to encounter increased competition, and continue depressing yields, as airlines struggled to fill vacant seats to cover fixed costs. 3. Customers are very price sensitive Because of the low cost strategy, the customers of Ryanair are much more sensitive to price, that means, any kinds of extra fees could ma ke bad influence on its corporate image. As a result, it is difficult for Ryanair to improve unit profit and have to reduce unit costs through scale expansion (O’Higgins). . Introduction of duty for fuel and environmental charges Since Ryanair is powerless to prevent the environmental charges such as the tax on aviation fuel, its growth potential would be reduced as the unit costs would be increased. SO strategies 1. Ryanair should use the low-cost passenger ticker strengths to attract more customers. Nowadays, global economic recession is a serious problem to all over the world, especially for Europe. Ryanair is a company most facing the European market. Customers now are more concern about the price. The company should catch this opportunity to occupy more market share. . Special â€Å"pay by use† service of Ryanair is one of its characteristics and the unusual features compared with other companies which can decrease costs of services. Ryanair can use the financial crisis of competitor’s and capture the opportunity to attract more customers and earn more profit than others. ST Strategies 1. In the next few years, low cost airlines market expansion would probably slow down because new opportunities would be more limited. As growth slows, labor costs for the low-cost carriers will continue to rise as well as the level of oil prices.Ryanair should be prepared for convergence of costs and conditions and make corresponding strategies, but it should still retain the ‘no-frills’ advantage of high seat density, aircraft utilization and lowest fares in any market (Air Scoop, 2007). 2. In order to achieve the aim to be the biggest player and keep its domination in the low-price market segment, Ryanair will have to expand into more popular routes coupled with retaining its differentiation strategy, such as purchasing newer, more fuel-efficient and environmentally friendly aircrafts and offering best customer services compared with its peer grouping in Europe.Strategic Assessment The core strategy of Ryanair Airlines is cost-focus strategy. The company continuously keeps its cost at a low level to offer low-fares services. Actually, cost control is the central strategy of all budget airlines, such as Ryanair’s main competitor in Europe—easyJet. In this part, we are going to assess Ryanair’s competitive strategy through a comparison with the operating performance of easyJet. EasyJet is a Europe's leading airline comes from the United Kingdom, founded in 1995, which has remarkable positions in some key markets: No. in Gatwick, Milan and Geneva; No. 2 in Paris with over 300 million people within a one hour drive of an easyJet carrier (easyJet plc, 2012). And easyJet is one of the leading lights of Europe's budget flight industry. 1. Financial results analysis with business strategy Table 1 Comparison of operating financial results between Ryanair’s & easyJets in 2012 Ryanair(? million)Eas yJet(? million) Scheduled revenues28273794 Ancillary revenues71560 Total operating revenues35423854 Scheduled revenues /total operating revenue79. 8%98. 4% Selected costs Fuel12841149 Maintenance84203 Marketing145104Total operating expenses29883323 Source: Ryanair Annual Report 2012 & easyJet Annual Report 2012 In their own financial year of 2011/12, Ryanair performed better than easyJet by ? 312 million in the total operating revenues (after exchange EURO to GBP with current rate), which mainly due to the high ancillary revenues from various ancillary services and involvement in other activities connected with its core air passenger services, including non-flight scheduled services, Internet-related services, and the in-flight sale of beverages, food, and merchandise (Ryanair annual report, 2012).Michael O’Leary talked previously about their ancillary strategy: â€Å"If you want a quiet flight, use another airline, Ryanair is noisy, full and we are always trying to sell you something† (O’Higgins, 2009). The ancillary strategy has been working well so far. However, the scheduled revenues which should be the primary business revenue of Ryanair were lower than its competitor easyJet. It might be caused by the cutting routes strategy and lower average load factors, especially the cutting routes strategy carried out in 2009, which has already cut down 389 rotes (1000 routes in 2009).In terms of operating costs, Ryanair had a better performance in controlling total operating expenses in 2011/12, which is ? 2988 million, while that of easyJet is ? 3323 million. However, Ryanair spent more on fuel and oil, which occupied nearly 43% of the Ryanair’s total expenses. Jet fuel is always variable and cannot be predicted previously. And jet fuel prices are dependent on crude oil prices, which are quoted in U. S. dollars. As a result, Ryanair’s fuel cost is affected by currency exchange. â€Å"Based on Ryanair’s fuel consumption fo r the year 2011, a change of $1. 0 in the average annual price per metric ton of jet fuel would have caused a change of approximately â‚ ¬1. 5 million in Ryanair’s fuel costs† (Ryanair annual report, 2012). In order to minimize its loss on fuel price change and currency rate, like many other airlines do, such as Southwest Airlines, Ryanair uses forward contracts to protect against fluctuations. Ryanair’s maintenance cost is relatively lower than easyJet. It might be largely due to the aircraft it adopts. Ryanair uses single fleet type—Boeing 737-800, which is considered to be one of the most fuel efficient fleet type, while easyJet has two types—Airbus A320, A319.The single fleet type reduces the number and cost of aircraft components in stock, as well as its maintenance cost. Ryanair’s marketing cost is more than easyJet’s. This may be a result of its promotion for ancillary revenue. In order to earn a widely range of revenue apart from scheduled revenue, Ryanair advertises its services in national and regional newspapers, as well as controversial and topical advertising (Ryanair annual report, 2012). 2. Growth capacity under strategy: Table 2: Ryanair’s financial performance(â‚ ¬Million) 20122011Changes Total revenue4,324. 93,629. +19% Profit before tax560. 4375. 6+50% Adjusted net profit after tax502. 6400. 7+25% Basic earnings per share (in euro cent)38. 0325. 21+51% Adjusted basic EPS (in euro cent)24. 1026. 97+26% Source: Ryanair annual report 2012 Ryanair’s operations have grown rapidly during 2011/12. This year, net profit after tax had a 25% increase after adjusted, total operating revenues increased by 19% to â‚ ¬4,324. 9 million as average fares rose by 16% (Ryanair annual report, 2012). Furthermore, ancillary revenues grew up by 11%, faster than the 5% increase in passenger numbers.Although the average load factor of Ryanair was lower than its competitor, there is still an incre ase of 13% (Ryanair annual report, 2012). In 2012/13, Ryanair plans to develop 330 new routes and intend to continue expanding its navigation, new destinations and new flights, which are expected to increase Ryanair’s booked passenger volumes to approximately 79 million passengers per year. In addition, there is a strategy of transferring operating flights from high cost airports to low cost airports in winter in order to reduce cost in off season.Overall, the company’s growth has been largely dependent on increasing performance and growing capacity. 3. Star rating & customer satisfaction From Low-Cost Airline Ranking in Official SKYTRAX Airline Star Ranking website (2012), the star ranking of Ryanair is two stars while easyJet is three stars. And easyJet ranked 5th in World's Best Low-Cost Airlines award, however, Ryanair wasn’t in this list. Actually, Ryanair always has a worse public image than its competitors due to its marketing strategy by making stunts.An d in some instances, the extra charges imposed on passengers such as check-in charges and booking fees make customers unsatisfied. What is worse, some flying accidents make its statements of punctuality and safety being doubted by the public. Conclusion Overall, Ryanair is successful in planning and performing its cost focus strategy. Facing with the strength, weaknesses, opportunities and threats, it is recommended that: 1. Ryanair should continue using its low fares to attract price-sensitive customers. 2. Ryanair can keep following its â€Å"pay by use† service, which is an effective way to ensure low price.However, when taking extra charges, it should consider the public’s attitudes to the fee. 3. Ryanair should continue controlling its costs to compete with other low fare airlines, especially fuel and oil costs. 4. Ryanair should pay attention to its brand and reputation, and make some efforts to earn a better degree of satisfaction. 5. Ryanair should take measure s to build a good relationship with authorities and governments. Reference List Gillespie, A. (2007), Foundations of Economics, Oxford University Press: Oxford O’Higgins, E. 2011), ‘Ryanair: the low fares airline – future destinations? ’,IN, Johnson,C. (ed. ) Exploring Strategy: Text and Cases, Pearson Education, pp. 618-627 Pearce, B. (2012), ‘The state of air transport markets and the airline industry after the great recession', Journal of Air Transport Management, Volume 21, July 2012, pp. 3-9 Rothwell, S. (2012), Ryanair Deepens Cuts at Edinburgh as BAA Seeks to Complete Sale [Online]. Available: http://www. businessweek. com/news/2012-04-12/ryanair-deepens-cuts-at-edinburgh-as-baa-seeks-to-complete-sale [Accessed: 12th April 2012]Box, T. M. (2005), ‘RYANAIR (2005): successful low cost leadership', Journal of the International Academy for Case Studies, Volume 13, Number 3, pp. 65-67 Air Scoop, (2007), The Low Cost Carriers Analysis Newslett er, [online], Available: http://www. air-scoop. com/pdf/air_scoop_May2007. pdf [Accessed: 10th December 2012]. Huff Post, (2012), Ryanair CEO Michael O’Leary Calls Passengers â€Å"Idiots†, [online], Available: http://www. huffingtonpost. com/2012/09/05/ryanair-ceo-michael-oleary-calls-passengers-idiots_n_1857143. html [Accessed: 10th December 2012]New Europe Online, (2011), Ryanair profits rise despite fuel costs and economic downturn, [online], Available: http://www. neurope. eu/article/ryanair-profits-rise-despite-fuel-costs-and-economic-downturn [Accessed: 10th December 2012]. Newll, I. (2006), ‘Is win-win just pie in the sky? ‘, Strategic Direction: The airline industry, Volume 22, Number 6 June 2006, pp, 3-5 O’Higgins, E. , 2011, Ryanair: the low fares airline – future destinations? , IN, Johnson,C. (ed. ) Exploring Strategy: Text and Cases, Pearson Education, pp. 618-627Routes Online, (2010), â€Å"Major opportunities remain in Europeà ¢â‚¬ Ã¢â‚¬â€Ryanair route director,[online], Available: http://www. routesonline. com/news/36/the-hub/97447/amajor-opportunities-remain-in-europea-a-ryanair-route-director/ [Accessed: 10th December 2012]. Sorensen, T. C. , (2005), An analysis of the European low fare airline industry- with focus on Ryanair, Aarhus School of Business. EasyJet Evidence, 2012. AT A GLANCE. [online] Available at: [Accessed 1 December 2012]. Ryanair, 2012. Annual report 2011-2012. [online]Available at: [Accessed 1 December2012]. easyJet plc, 2012. Annual report 2011-2012. online]Available at: [Accessed 1 December2012]. STARTRAX Evidence,2012. Low-Cost Airline Ranking. [online] Available at: [Accessed 1 December 2012 ] Appendix Selected operating data RyanaireasyJet PASSENGERS (JAN’11 – DEC ’11)76. 4million55. 5million AVERAGE LOAD FACTOR82. 2%87. 5% NUMBER OF DAILY FLIGHTS13531260 COUNTRIES SERVED2730 DESTINATIONS162130 ROUTES6111400 PERMANENT EMPLOYEES75719000 NUMBER OF AIRCRAFT27 5202 AVERAGE FLEET AGE3. 03. 9 FLEET TYPE275 Boeing 737-80035 Airbus A320 167 Airbus A319 Sources: European Low Fares Airlines Association (ELFAA), December 2011